New mechanism of central fund flow to states to add to transparency

Annual state plan outlay currently does not incorporate Centrally Sponsored Schemes

The UPA government’s move to hand over major power to states by way of a three-fold increase in central assistance to state plans in the interim Budget of 2014-15 could bring in much-needed transparency in the flow of central support to the state development plans.

The increase in central assistance to state plans followed a move to restructure centrally sponsored schemes (CSS) and reduce their numbers from  126 to 66.Because of the restructuring, central assistance to cental  plan will come down in 2014-15 compared to the revised  estimate  of 2013-14, but the fund flow  to state  plan will rise.

Annual state plan outlay currently does not incorporate CSS. However, now it will do so under additional central assistance. Besides, state plan outlay comprises  normal  central assistance and special  central assistance.  

The new arrangement of including CSS in state plan  outlays will clearly spell out the total central assistance to the states in carrying out development initiatives.

Even before the Finance Minister presented the interim Budget for 2014-15 in Parliament on Monday, the Planning Commission had directed states In December to prepare its 2014-15 annual plan proposals in accordance with the guidelines of restructured CSS as their respective size could see a big change.

As a fall-out of the move, central outlay for many union ministries have come down. This would result in reduction of allocation to many sectors under these ministries in 2014-15 compared to RE of 2013-14. For example, agriculture and allied  activities would  show a decrease by 43.11 and social services by 54.31 per cent.  

However,  deeper analysis would  suggest that there will not be any reduction in fund  flow to states as they will get higher funds directly as additional central assistance in 2014-15 compared to RE of 2013-14. The annual plan of state government will now onwards also reflect this change.

Funds routed through the Central Plan gave limited flexibility to states, while those routed as Central Assistance to State Plans give them greater flexibility, of course within the broader objective of the sector.

Primarily, central assistance flows to state governments through three routes. First is through the grants-in-aid determined by the Finance Commission, then by the Planning Commission through the Gadgil-Mukherjee formula and thirdly through CSS.

"Central assistance means the funds will directly go to state planning departments, which will then allocate it to its different departments," former Planning Minister Yogendra Alagh told Business Standard.

He said  this should strengthen the planning process and also help states avail more untied-funds.

"But, at the same time there should be proper monitoring of the whole process,” Alagh said.

Government always has been in favour of transfer of funds through treasury, but states are divided on this, former Planning Commission member N C Saxena said. "Because if funds are transferred directly through banks, states have little control over its implementation," he said.   

Budget papers laid in Parliament under the Fiscal Responsibility and  Budget Management (FRBM) said the measure will lead to more focused monitoring and implementation of the schemes.

The interim Budget also approved a system of flexible funds in the 66 CSS. It means that within the Budget of the same scheme, there will be a portion (around 10 per cent) on which states will have the discretion to spend. However, schemes like MGNREGA, National Food Act and also schemes which already have proper flexibility like Rashtriya Krishi Vikas Yojana (RKVY) have been kept out of the  new mechanism.

“In some schemes like Sarva Shiksa Abhiyan (SSA), it was seen that state governments didn’t even have the freedom to purchase two extra water pots in schools without central nod. This crippled their implementation which the flexi-funds will do away with,” Alagh said.

The that state governments will not be able to divert flexi-funds to any other sector, substitute state’s own non-plan or plan schemes and use for routine operational expenses like paying salaries etc, the budget papers said.